What are the tax benefits of a 529 plan in 2025?

A 529 plan is a tax-advantaged savings account designed for education expenses. While contributions are not deductible on your federal return, the investment growth and withdrawals have significant tax benefits.

Federal tax benefits:

• Tax-free growth: Earnings grow free of federal income tax
• Tax-free withdrawals: Withdrawals used for qualified education expenses are completely tax-free
• No income limits: Anyone can contribute regardless of income
• High contribution limits: Most state plans allow total balances of $300,000-$550,000 per beneficiary

State tax benefits: Over 30 states offer a state income tax deduction or credit for 529 contributions. Amounts vary: for example, New York allows up to $5,000 ($10,000 MFJ) deduction, while some states offer unlimited deductions. Some states require you to use the in-state plan for the deduction.

Qualified expenses:

• College tuition, fees, books, supplies, equipment, and room and board (if enrolled at least half-time)
• K-12 tuition up to $10,000 per year per beneficiary (federal level; some states do not conform)
• Student loan repayment up to a $10,000 lifetime limit per beneficiary
• Apprenticeship program costs

Non-qualified withdrawal penalty: If you withdraw money for non-qualified expenses, the earnings portion is taxed as ordinary income plus a 10% penalty. The contribution portion (your original deposits) is always returned tax and penalty-free since it was made with after-tax dollars.

New in 2024: 529-to-Roth IRA rollover. Under SECURE Act 2.0, you can roll up to $35,000 lifetime from a 529 plan to a Roth IRA for the same beneficiary, subject to annual Roth IRA contribution limits ($7,000 for 2024). The 529 account must have been open for at least 15 years. This provides a great fallback if education funds are not fully used.